Cash is King: Pilgrims Pride (PPC) Down 40%

I wrote in Cash is King on Monday

Anyhow, my other point on cash is this - in a market devoid of credit and quite frankly years of contracted credit ahead of us, cash will again be king. Balance sheets will matter again. And in the near term any debt is a Sword of Damocles as all it takes is Moody's or S&P to downgrade your debt and you face a short selling attack (unless you are on the protected list of course!) which will cause the stock to lose 40% in 5 minutes.

Yesterday, a company we follow for completely different reasons (food inflation), Pilgrim's Pride (PPC) fell 40%. This is one of a bevy of chicken, beef, hog type producers who have had their hat handed to them in the past year as grain costs spiral up and they have not been able to pass the costs on to the weakening US consumer. They announced some job cuts to help combat this earlier this week but then out of the blue down 40%. It appears the culprit is indeed, their debt load.

• Chicken producer Pilgrim's Pride Corp (PPC) shares fell as much as 40 percent to a five-year low on Wednesday before being halted, leading a slide in U.S. meat companies' stock as investors worried that credit would become harder to get in the deepening financial crisis.
• "I think it is a fallout from the credit issue," said Len Steiner, a food industry consultant with Steiner Consulting Group. "Anybody that needs lots of capital, which is any meat company, is going to get squeezed here. I keep hearing the availability of credit is just drying up."
• "Tyson and Smithfield have had to access debt and equity markets to raise capital. Pilgrim's Pride has not done that, and it doesn't look like it is going to be any easier for them to do it now," said Morningstar analyst Ann Gilpin. "I think of the three big meat packers, they need capital more than Tyson and more than Smithfield," she said.
• Shares of Tyson Foods Inc (TSN), the largest U.S. meat producer, fell 5.3 percent to $12.14, and shares of Smithfield Foods Inc (SFD), the leading pork producer, closed down 9 percent at $16.92.
• Morningstar suspended its stock ratings on the three companies in the wake of Wednesday's stock declines. "Clearly something is going on, and we don't know what it is," said Gilpin. "We are taking a closer look at the fundamentals. These are highly leveraged firms with significant exposure to commodities, which have raised havoc with profits recently."
• U.S. meat companies have been hurt this year largely because of high prices for feed and fuel. Chicken companies, in particular, have struggled because prices for breast meat, a key revenue producer, have been weak.

This is the type of random out of the blue carnage that simply makes this market treacherous. the ability to lose 40% in hours is rampant. I will be interested to see if the shorts mount an attack on the other few mainline meat processors as they sense blood in the water. You know the act by now, buy puts up the wazoo, short the stocks, (if they have credit default swaps bid them up), create crisis - send 'em to bankruptcy or near. We just saw this in Constellation Energy (CEG).

Cash is king. Debt is now a cancer. Until that changes any stock with meaningful debt it needs to roll over is toxic. And it could be this way for years. Unfortunately the US economy does not work without credit.

Deleveraging continues across the landscape.

No position